US crude prices dipped below $40 per barrel as Opec+, an alliance led by Saudi Arabia and Russia, started raising output.
Futures in New York fell 0.84 per cent to trade at $39.93 per barrel at 2.51pm UAE time in the anticipation of more crude coming to the markets in August.
Brent, the international benchmark, was down 0.28 per cent at $43.24 per barrel.
"Softer global risk appetite and increased downside pressure on global oil demand has been preparing the ground for a slide below the $40 per barrel in WTI crude,” said Ipek Ozkardeskaya, senior commodity analyst at Swissquote Bank.
Encouraging manufacturing data, though, should slow down the softening in oil prices, she added.
“But even signs of economic recovery will unlikely prevent a downside correction below the $40 mark as the premature tapering of the Opec production cuts increases the worries of a higher global glut in the coming months.”
Opec+ agreed in April to draw back 9.7 million barrels per day from the markets in May and June in an effort to balance the oil market. The pact was eventually extended until the end of July.
West Texas Intermediate, which largely tracks US crude grades, fell below zero in April as production outstripped available storage capacity at the benchmark’s physical delivery point in Cushing, Oklahoma. The move by Opec+ to cut production helped draw down inventory levels and returned oil prices to above $40 per barrel.
However, with movement restrictions easing in many parts of the world and demand for oil picking up, the joint ministerial monitoring committee of Opec+ agreed to ease the record level of cuts. From August 1, the group said it will draw back 7.7m bpd of crude from the markets. Countries that had previously failed to comply with the pact will make compensatory cuts until September. The additional volume of cuts to be made by Iraq, Nigeria, Angola and Kazakhstan could easily bring the overall withdrawal from the markets to an average of 8.1m bpd.
Voluntary cuts made by a core group of Opec producers such as Saudi Arabia, the UAE and Kuwait have also ended. Riyadh pledged an additional cut of one million bpd in June, bringing its total output curbs to 4.8m bpd.
Kuwait and the UAE were cutting back an additional 80,000 bpd and 100,000 bpd respectively. Following the decision to taper cuts to 7.7m bpd from August 1, the Gulf producers will no longer make these additional voluntary commitments.
Opec+ will keep production restrictions in a tapered manner until April 2022. The group’s technical and monitoring committees will meet on August 17 and 18, respectively, to assess compliance to these output curbs.
